Monday, June 17, 2013

The Best and Worst Way to Pick a Charity

Experts have noted that a one dimensional focus on nonprofit finances, if not supplemented by other information, can lead a donor/social investor to make the wrong decision as to which nonprofit they support. Except in extreme cases, we think that is correct. In addition, experts have noted that an overemphasis on overhead is misleading. We agree and always have. We further believe that the most critical dimension in evaluating a nonprofit has to do with achieving meaningful results. It is in that spirit that we jointly signed on to today’s press release about overhead, with the BBB Wise Giving Alliance and Guidestar. On the other hand, we do not agree with those that say there is no place for overhead in evaluating charities.That is why we think that many of Dan Pallotta’s arguments are extreme and “dead wrong.” I have more detailed explanations of my many disagreements with him here, here, here and here. Specifically on the issue of overhead, show me a nonprofit that uses 70% of its funds for overhead and I predict with a great deal of certainty that it is an organization that is either clueless or focused on lining someone’s pockets rather than effectively serving others. People may disagree on what the best metric of overhead should be, but to say overhead is irrelevant is to deny a useful indicator of where many thieves and scoundrels dwell. I have worked in enough nonprofits with unethical leaders to say without question that we need to get serious about their existence as more than a rarity (see the book Silence, by Gary Snyder). As noted above, this is not meant to imply in any way that overhead is the only metric donors should consider, but rather that it is an important data point.This is exactly why, for a number of years now, we have been working towards a three dimensional rating system (which we now call CN 3.0). Specifically, we believe the three dimensions that must be considered for a social investor to have the critical information needed to make a wise decision are the charity’s:

Financial Health (CN 1.0 launched April 2002) – Is the nonprofit sustainable? Does it have robust financial strength to survive in good times and bad? Is the overhead not at the extreme end of the continuum?

Accountability & Transparency (CN 2.0 launched September 2011) – Does the organization have ethical practices, good governance and transparency? Is it accountable to its constituents?

Results Reporting(CN 3.0 methodology launched January 2013) – Can the organization supply information about meaningful and lasting change in the communities and lives of the people it serves? Can they show evidence that these changes are as a result of their efforts? Do they have systems and processes in place to effectively manage their performance?

Some question whether people who are “casual” (i.e. not super rich) investors, care about this sort of information. Our answer is proven by data. We had over 6 million visits to our site last year by donors seeking objective data on how they should invest an estimated $10 billion dollars of charitable gifts. That is with our existing, admittedly two dimensional rating system. Can you imagine the impact CN 3.0 will have on giving?I believe that this is a critical battle for the very soul of the nonprofit sector. We MUST get past the notion that overhead is all that matters, while recognizing that efficiency and financial health is of critical importance in maintaining high performance and the best results for the long term. We MUST get past the notion of doing the “good work” with no accountability and transparency, because we know that charities without strong governance and ethical best practices are far more likely to have leadership problems. Once again, to maintain effective results we have to have these characteristics and policies in place. Finally, we MUST get past the idea that nonprofits are too complex or unique to be measured. I have seen it close up for years and it is not a pretty picture. The nonprofit sector must get its act together and make sure it is really helping provide meaningful and lasting change. It is life or death for many of those we serve whether charities are efficient, accountable, transparent and effective or not.

24 comments:

Ruben Vassolo
said...

Thank you for the informative post. I agree there is an overemphasis on overhead and recognize the utility and timeliness of CN 3.0.

CN 3.0 may already include this, but if not, Charity Navigator should consider adding the following two prongs to its rating system: (i) extent to which nonprofit adheres to its tax exempt purpose; and (ii) extent to which individual directors advance the nonprofit's tax exempt purpose instead of their own selfish interests.

You can find the full concept note on the new results reporting dimension to our rating system here - http://www.charitynavigator.org/__asset__/_etc_/CN_Results_Reporting_Concept_Note.pdf

As to your two suggestions. You should find element one in the concept note does address your first point. As to the second, that is not easily measurable with the publicly available data we have. However, I think we do get to it within the donor advisory system. You can learn about that here - http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=1072

Ken, I enjoyed reading CN's Results Reporting Concept Note and about CN's donor advisory system. Thank you very much for the links. CN is a great tool which I use and recommend often. Thank you.

CN's efforts are laudable and on target. The proliferation of transparent public results reporting should benefit us all. Thank you for embarking on such a herculean task.

One wonders whether there is a role for governmental agencies besides the taxing authorities and the attorneys general to prosecute nonprofits that report falsely. Certainly a lot can be learned from the SEC's long-standing battle against public companies that report falsely.

The government has a vitally important role to play, on both the state and federal level, to assure that charities are meeting their public purposes and not providing private inurement to the leadership.

Sadly, we see evidence that the already minimal oversight that is being provided by government is decreasing even further. In addition, policy matters are left unaddressed for years.

I believe that a better financing mechanism (i.e. nonprofit sector organizational support) is needed for governmental entities so that they have a more reliable means of supporting their operations. Otherwise, they will continue to be decimated by cuts due to the winds of politics and the fluctuating economy. Furthermore, the unit within the IRS that oversees tax exempt organizations needs to be moved out of there to a more appropriate governmental department (probably within the Treasury Department). The mandate of the IRS is to assure that taxes are paid. What does that have to do with tax exempt organizations? Meanwhile, the charitable sector adds many tens of thousands of new organizations each year, while state and federal departments are decreasing in size.

It is indeed a travesty that a sector of the economy that generates one out of ten jobs and has assets over $4 trillion and annual revenues around $1.5 trillion, remains the wild west.

Thank you for your detailed and thoughtful comments. Though the nonprofit wild west needs a new and better governmental marshall, I am comforted by your and CN's significant efforts to reduce cheating.

I commend you for taking the time to educate readers like me. Your comments are instructive and insightful. You are setting the transparency bar high for other CEO's. Keep up the great work!

One problem is that you cannot apply a one-size-fits-all approach to overhead. There is not perfect percentage, because the nature of the business has something to say about it. A more appropriate use of the word overhead to me is in the manufacturing and retail sectors. And it isn't on-size-fits-all there either, because different products require different formulas, and the profitability goals are different.

All nonprofits are not created equal, and an organization with 40-50% overhead can be as effective or more as one with 10%, depending on the "product" they offer.

At the end of the day, you and I are debating this subject with minimal data on either side. The reality is that the vast majority of nonprofits do not report meaningful information on their results. So how can we know definitively who is right and wrong on this subject? Nonetheless, I reiterate my point that, based on 30 years experience, I find no good examples of charities with such high overhead that are effective.

Finally, as to your critique of "one size fits all", we do make adjustments by cause or focus area as needed when the data indicates the necessity. That means, we find that the norm for a particular cause or focus area is different than the others.

It is a good point you make about needing to focus on more than just overheard. That is interesting that you list financial health as a good way to pick a charity. Part of me is less convinced about that. If a charity uses the contributions it receives effectively that seems far more important than if it will remain a going concern in some future downturn or if it slowly spends down a single large gift that largely fund. I don't think that whether an organization keeps higher reserves or spends down gifts at a slower rate than a faster rate should affect whether it makes sense for new donors to give money to it.

We are not saying that "financial health is a good way to pick a charity". What we are saying is that there are three critical dimensions to picking a charity, (1) financial health (2) accountability/transparency and (3) results reporting.

On the question of reserves, if a charity does not have such a "rainy day fund" if there is a financial dip it could cause the closure of programs or even the agency. So that is one of the elements to consider when thinking about financial health.

The point of all this is to have a multidimensional view and not just focus on one thing. Clearly though, the most important thing for a charity to achieve is meeting it's mission of helping and providing meaningful results!

I found out about Charity Navigator a couple of months ago and have been following your website, blog and Twitter feeds with interest. I work for an organisation called Molly's Network, which is the first accreditation and support agency in Tanzania.

We are a new organisation (founded 2011) and we are currently re-working our assessment process to be much more rigorous. We have met with and reviewed similar models from around the world (including looking at your model), and we are working in partnership with a risk management corporation to design the new assessment.

Your points of overheads here are interesting - and extremely pertinent to Africa, where development is a business and NGOs are often seen as a money-making business.

However, I am interested in Charity Navigator more widely than this. Specifically it would be really great to hear how you have grown and developed your reputation with donors in the US (we are very aware that for Molly's Network to be successful, those investing in Tanzania need to understand and buy in to the accreditation).

Please contact Sandra Miniutti, our VP of Marketing, who can give you some background on our growth and reputation. She can be reached via email at sminiutti@charitynavigator.org. Let her know I referred you to her!

I respectfully take issue with some of your observations/conclusions as I do with some of Dan Pallotta's. Yet the core of the discussion should not be hosted at the extremes. Those of us in the field are most generally supportive of best practices and we abhor abuses.

Compensation is but one issue and it cannot be judged by any one common metric across all non-profits. To some degree in business parlance, you get what you pay for.

With increased demands being made of organizations, organizations which also may tend to arbitrarily limit overhead, this discussion has a long way to go before it will reach resolution.

We have employed the much broader Guidestar Compensation Report as a guideline for setting salaries and we are aware of the market in which we operate.

As far as total overhead goes, we annually prepare a set of metrics and compare them to our colleagues on a national level.

Unfortunately there are few standards established and so measurement is somewhat arbitrary. Even the standards set by CN are not applicable across the board. The input required on the Form 990 lacks clarity from the IRS and our national organizations are not always attentive to this most important aspect of non-profit evaluation. At the very least, CN has a template.

Many of our leaders say that a charity should operate more like a business. Yet when they cross the threshold to the Board room, they all too frequently leave their business acumen behind them. With due respect to lay leadership and other volunteers, they do not bring a uniform set of leadership and business-related skills. Arguably, we should only choose leaders who more fully understand our mission and our operations. In the real world, this does not always work as prescribed.

I would be interested to know what you take issue with regarding my views and commentary. I believe my positions are typically in line with best practices within the field. Further, they are typically relatively "middle of the road". On the other hand, I have been trying to point out the profound flaws in Mr. Pallotta's arguments for some time now. I believe he is truly the one that has extremist views by taking legitimate concerns and pushing things to the fringe.

As it relates to CEO compensation, I concur with the practice of mid-to-large sized charities periodically having a compensation study conducted by an outside expert. In addition, that CEO salaries are benchmarked against comparables by their cause area, geographic location, budget size and the particular level of expertise of the individual CEO.

As to your concern regarding overhead, I believe our signing of the overhead myth letter along with Guidestar and the BBB Wise Giving Alliance once again shows our alignment with a middle ground position of best practice.

Finally, I completely agree with your concerns regarding many nonprofit Boards! So in that case, you and I are in alignment. However, I do believe for profit business can learn as much from nonprofits as the other way around. See this article - http://www.ssireview.org/blog/entry/the_nonprofitization_of_business

Of course we are missing results and must focus on results reporting first! Why? Because the vast majority of nonprofits do not yet publicly report on their results. Until that state of affairs changes to say that we will look at results would be foolhardy since there is no "there, there". We are hoping to incentive a change in the sector to make such reporting normal. Once that happens, we can finally get to what our founder calls the "holy grail" and finally assess charity results.

I've always felt Charity Navigator is obsessed with the cost of fundraising. They take the position fundraisers are blood sucking parasites that rip off the general public and take food from the mouths of babes. In that old questions of "glass half full or half empty", the truth is that fundraisers don't empty the glass half way, the fill it from empty to half full. Without professional fundraisers many charities would simply be forced to close their doors.

Let's take a different perspective on the economics of fundraising, the simple fact that in addition to the money delivered to the charity, thousands upon thousands of dollars go back into the community in the cost of operation. While it's true less than 5% goes back to the charities, the vast majority of the remaining 95% goes to overhead (operators, equipment and phone bills), not to line the pockets of the fundraisers. Those operators pay rent, but food, rent movies, and in short, circulate their salaries back through the local community. Isn't it better to have people employed and the local economy thriving vs collecting government handouts?

Charity Navigator is obsessed with one thing, providing the best guidance we can to donors so that they can give/invest in the most high performing charities. There are two fundraising metrics we consider out of the 39 metrics that are within the three dimensions (finance, A&T and results reporting) of our rating system. Is that an obsession with fundraising?

We have no problem with charities hiring and relying upon professional fundraisers. In fact, we consider it a critical role within mid-to-large charities. What we do have concerns about are telemarketers who often gauge charities for outrageous fees. As you acknowledge, in some cases 95% or more of the money raised goes to these for profit entities. To claim that it is ok because the telemarketers "pay rent, go to the movies ..." and generally help support the US economy is like saying Mussolini had the trains running on time! We want the most efficient and effective ways to raise money being utilized, not rip offs that provide far less for quality programs to those in need.

Restricting fundraising has nothing to do with candy bars or buying cars. Using for profit analogies does not work when you are supposed to be dedicated to providing a public benefit where traditional market forces do not work. Further, any donor with common sense is correctly outraged that their money is largely going to something other than what they intended.

Let's be clear, fundraising is a valid and important role for any charity to do well. On the other hand, telemarketing is often done poorly in that it wastes precious charitable dollars, as well as the most precious fundraising "commodity", the public trust.

Ken,Regarding telemarketers: here in NY State the Attorney General's office used to send out a large monograph listing all charities active in the state. I was appalled to learn that some of their operations resulted in a net loss to the charity and in many instances they received a small percentage of money collected. I never respond to telephone solicitations ,even ones I support, except to tell them I never respond to such solicitations and to please remove my name.

As a standard requirement from all charity organizations should include the following:1) How the organization is actually providing the help and how they track the effect.2) Identify and quantify the recipients of their funds3) Provide validated statistics on the effects of their support to the recipients.4) Verifiable financial declarations i.e. tax filing or some sorts.

The above should be provided in a clear condensed form for easy reading.

Overhead is a major issue.., i would consider contacting my Congressman to propose a law that states that all non profits can continue to solicit with the requirement that they inform the prospect if they contribute less than 50% to the charity. Let the consumer decide if that is important .... Jb10750@aol.com

What you suggest, though very rationale and appropriate, is far away from where things are today and it is certainly not the charity's fault alone. Many funders are unwilling to pay the full cost of what it would take for the charities to manage and measure their performance in the way you and I agree it should be reported.

Indeed it is important and a number of states have attempted to do something similar to what you suggest. In those cases they set that bar at if 70% or more went to overhead. Sadly, to my knowledge all of those attempts failed.